Pakistan removes tax on income earned by foreign digital companies

Pakistan has repealed a recently imposed tax on foreign digital companies, following a request from the United States amid ongoing trade and tariff negotiations.

The main aim is to boost trade and improve trade relationship amongst the trading partners.

The Federal Board of Revenue (FBR) on Wednesday issued a formal notification suspending the Digital Presence Proceeds Tax, which was part of the Digital Proceeds Tax Act 2025.

The tax, originally set at 5%, applied to goods and services digitally ordered from outside Pakistan by foreign entities and was scheduled to take effect from July 1.

“The federal government has decided that the Digital Presence Proceeds Tax shall not apply to digitally ordered goods and services supplied from outside Pakistan by any foreign person,” the FBR stated.

The move follows formal approval by the federal cabinet earlier in the day and comes in direct response to concerns raised by Washington over the impact of the tax on global digital firms, particularly U.S. tech giants like Google, Amazon, and Meta, which are significant players in Pakistan’s growing digital economy.

U.S. pushes for tax repeal

The tax had become a sticking point in trade discussions, with U.S. officials arguing it posed an unfair barrier to digital trade and undermined the broader objective of expanding bilateral economic ties. During recent negotiations, the U.S. trade delegation urged Pakistan to repeal the tax as a confidence-building measure, especially as both sides worked toward finalizing a comprehensive trade agreement.

The negotiations follow a period of strained trade relations.

In April, President Donald Trump announced a 29% reciprocal tariff on Pakistani exports, citing Pakistan’s imposition of digital taxes on American firms and its “unbalanced trade practices”.

The newly repealed digital tax was part of Pakistan’s efforts to broaden its tax base and increase digital economy oversight, but it faced criticism both domestically and internationally for potentially stifling foreign investment.

Wednesday’s rollback is now seen as a strategic concession by Islamabad aimed at unlocking U.S. market access and restoring investor confidence.